Network Game and Capacity Investment Under Market Uncertainty
Article first published online: 6 OCT 2009
© 2009 Production and Operations Management Society
Production and Operations Management
Volume 19, Issue 1, pages 98–110, January/February 2010
How to Cite
Hu, Q. (2010), Network Game and Capacity Investment Under Market Uncertainty. Production and Operations Management, 19: 98–110. doi: 10.1111/j.1937-5956.2009.01069.x
- Issue published online: 8 JAN 2010
- Article first published online: 6 OCT 2009
- History: Received: September 2007; Accepted: April 2009, after 2 revisions.
- cost advantage;
This paper investigates the impacts of competition and market uncertainty on airlines' network structures and capacity investment. The airlines choose their network structures and construct capacities while demands are unknown. After uncertainty is resolved, they determine the total number of seats to offer in each leg constrained by their capacities built earlier. We conclude that market uncertainty is the driving force of hub-and-spoke networks, whereas the market mean is the driving force of point-to-point networks. Which of the two countervailing forces dominates determines the equilibrium network structures. Moreover, we find that the airlines' total expected profits in the mixed equilibrium in which the airlines employ different networks are larger than in the pure hub-and-spoke network equilibrium in which each airline employs the hub-and-spoke network. However, the mixed equilibrium does not necessarily yield larger profits than the pure point-to-point equilibrium in which each airline employs the point-to-point network.